Balance Sheet Definition and Examples
Examples of Assets, Liabilities, and Equity
A Balance Sheet is a statement of the financial position of a business which states the assets, liabilities, and owners' equity at a particular point in time. In other words, the balance sheet illustrates your business's net worth.
The balance sheet is the most important of the three main financial statements used to illustrate the financial health of a business. The others are:
- The Income Statement, which shows net income for a specific period of time, such as a month, quarter, or year. Net income equals revenue minus expenses for the period.
- The Cash Flow Statement, which shows the movements of cash and cash equivalents in and out of the business. Chronic negative cash flow is symptomatic of troubled businesses.
Incorporated businesses are required to include balance sheets, income statements, and cash flow statements in financial reports to shareholders and tax and regulatory authorities. Preparing balance sheets is optional for sole proprietorships and partnerships, but is useful for monitoring the health of the business.
An up-to-date and accurate balance sheet is essential for a business owner that is looking for additional debt or equity financing or wishes to sell the business and needs to determine how much it is worth.
All accounts in your General Ledger are categorized as an asset, a liability, or equity. The relationship between them is expressed in this equation:
Assets = Liabilities + Equity
The items listed on balance sheets vary from business to business depending on the industry, but in general the balance sheet is divided into the following three sections:
As in the balance sheet example shown below, assets are typically organized into liquid assets—those that are cash or can be easily converted into cash—and nonliquid assets that cannot quickly be converted to cash, such as land, buildings, and equipment.
The list of assets may also include intangible assets, which are much more difficult to value.
Generally accepted accounting principles (GAAP) guidelines only allow intangible assets to be listed on a balance sheet if they are acquired assets that have a lifespan and a clearly identifiable fair market value (the probable price at which a willing buyer would buy the asset from a willing seller) that can be amortized. These are reported on the balance sheet at the original cost minus depreciation. This includes items such as:
Liabilities are funds owed by the business, and are broken down into current and long-term categories. Current liabilities are those due within one year and includes items such as:
- Accounts payable (supplier invoices)
- Income tax deductions
- Pension plan contributions
- Medical plan payments
- Building and equipment rents
- Customer deposits (advance payments for goods or services to be delivered)
- Temporary loans, lines of credit, or overdrafts
- Maturing debt
- Sales tax and/or goods and services tax charged on purchases
Equity, also known as shareholders' equity, is that which remains after subtracting the liabilities from the assets. Retained earnings are earnings retained by the corporation—that is, not paid to shareholders in the form of dividends.
Retained earnings are used to pay down debt or are otherwise reinvested in the business to take advantage of growth opportunities. While a business is in a growth phase, retained earnings are typically used to fund expansion rather than paid out as dividends to shareholders.
Sample Balance Sheet
|Current Assets:||Current Liabilities:|
|Cash in Bank||$18,500.00||Accounts Payable||$4,800.00|
|Petty Cash||$500.00||Wages Payable||$14,300.00|
|Net Cash||$19,000.00||Office Rent||—|
|Accounts Receivable||$5,300.00||Federal Income Tax Payable||$2,600.00|
|Total Current Assets||$55,200.00||Customer Deposits||$900.00|
|Fixed Assets:||Union Dues Payable||—|
|Buildings||$330,000.00||Sales Tax Payable|
|Less Depreciation||$50,000.00||Total Current Liabilities||$24,950.00|
|Net Land & Buildings||$430,000.00|
|Net Equipment||$33,000.00||Total Long-Term Liabilities||$195,000.00|
|Owner - Draws||$50,000.00|
|Total Owners' Equity:||$298,250.00|
|TOTAL ASSETS||$518,200.00||LIABILITIES AND EQUITY||$518,200.00|
Should I Do the Balance Sheet for My Business?
For a startup business it is a good idea to have an accountant do your first balance sheet, particularly if you are new to business accounting. A few hundred dollars of an accountant's time may pay for itself by avoiding issues with the tax authorities. You may also want to go over the balance sheet with your accountant after any major changes to your business.
Accounting Software Can Generate Balance Sheets Automatically
Balance sheets are easy to do if you use accounting software. Accounting software designed for small businesses can keep track of all your accounting information and generate balance sheets, cash flow statements, and other reports automatically as needed.
Also Known As: Statement of financial position.